Tuesday, November 25, 2008

Bank Collapse Watch: ALL OF THEM!

Federal regulators got a fresh inside look at Citigroup's books over the weekend—and it wasn't pretty.

The result: a new $306 billion federal bailout for the bank. On the one hand, it provides more clarity as to the lengths the government will now go to shore up the U.S. financial system. On the other hand, investors continue to be wary about whether Citi was worth saving from oblivion. Worse, some of them worry that if a bank with one of the highest capital ratios nearly went under, who's next?

"You had a tremendous amount of people looking inside at Citi in the last few days to figure out how bad it was, and they came away thinking that the capital markets can't handle this," says David Ellison, manager of the $185 million FBR Small Cap Financial Fund. "So, Citigroup wasn't a going concern. What does it tell you about the industry and everybody else all around the world that has the same assets?"

Emphasis added by me.

When does the light bulb come on? When does the dawn break? When it is as clear as glass?

Every bank in the entire world is bust. The contamination is global. This is Game Over!

We are being carted off in metaphorical boxcars to the concentration camps of Depression 2.0 and Hyperinflation. Total and utter systemic destruction of the entire world we have known.

Every dollar being thrown at this is being deflated down to about ten cents. And that's me being optimistic. The pessimistic side of me believes every dollar tossed is actually going negative. Not only isn't a dollar destroying debt, it's creating brand new debt. In exactly the same way Michael Lewis detailed in The End.

Read between these lines, dammit:

Under the guarantee, Citi will assume any losses on the $306 billion portfolio up to $29 billion on a pretax basis — meaning the government will assume 90% of any losses.

According to people familiar with the negotiations, the government struck a plan to "ring-fence" around about $300 billion in questionable assets, which will remain on Citigroup's books. That was the only group of assets for which the feds and Citi could agree on a potential value, sources say. That amounts to just 15% of Citi's total assets, which are a shade over $2 trillion.

The plan is not only good for the system, say those sources, but it provides cheap insurance for the government compared with the costs of a financial system in meltdown mode.

Sources also say that the calculations on the value of the portfolio were made on the "very unlikely event" that the U.S. economy has a downturn as severe as the Great Depression. The values of the assets in that $300 billion pool were based on projected cash flows for the life of the assets and not on their current and fluctuating distressed prices.

There's only one reason to agree to such terms, says Ellison: to stay alive. "There are capitalists all over the place, but no one wanted to do the deal," he adds. "This is chemo. They need this capital to stay alive."

By one measure — tangible common equity to tangible assets — Citi already was on life support. The ratio is a strict definition of shareholder capital (setting aside infusions from TARP or the government) compared with the book value of a bank's assets. It's not a number that necessarily defines the overall financial health of a bank, but it's one gauge to measure capital adequacy. A bank that ranks low on this measure doesn't necessarily rank low on other measures. For Citi, that ratio is 2.4% vs. a more typical ratio for big banks of 5% to 6%.

That means a 1% decline in the value of Citi's assets, or $20 billion, would reduce common shareholders' equity by about 42%. Says Bill Mann, financial analyst for Motley Fool: "What's scary is that it wouldn't have taken much for the bank to be wiped clean."

Emphasis added by me.

What are CitiGroup's assets?! Shit! And Shit 2.0! Securities based on fraudulent mortgages for homes which are plummeting in value. The Government could see the price of homes going into the toilet -- they had to have shared that news with all the banks prior to making it public. That had to force CitiGroup's hand! CitiGroup did the numbers and they came up COLLAPSE!

The true bottom line:

If Citi was in dire need of government intervention, what about other big banks? Joel Cohen, co-CEO of Sagent Advisors, a financial advisory firm and former co-head of global mergers and acquisitions at Donaldson, Lufkin & Jenrette, isn't encouraged: "There's still a lot of this bad stuff on banks' balance sheets."

How long will we have to wait for that to pass through the intestines of economic orthodoxy? How much more pain will that create -- and to how many? And who will be left holding a bag of Shit 2.0 in the end? We will -- as our nation (as well as other nations) throws our current and future tax dollars into this new Toilet 2.0.

Are we going to get to one thousand bank failures? Only twenty-two have been seized thus far. How long for the nine-hundred and seventy-eight others to fall?